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A R

Building the Future

2017 was a strong year for SRC and our partners. The combined Joint University Microelectronics

Program (JUMP) in partnership with DARPA and the nanoelectronic Computing Research (nCORE)

program in partnership with NSF and NIST consisting of ten industry sponsors was built and is set for

launch 1/1/18. These programs represent over $250M of exciting university research to explore new

directions with cross‐discipline teams taking a holistic view across the design hierarchy stack to attack

the challenge of extending Moore’s Law economics in the face of a dramatic slowdown in dimensional

scaling. Furthermore, SRC held workshops or special sessions in four emerging new topic areas:

Bioelectronic Medicine (BEM), Automotive Cybersecurity and Autonomous Vehicles (AC/AV), Intelligent

Cognitive Assistants (ICA) and Molecular Information Storage (MIST). The output of these sessions

defined a research agenda to which SRC will recruit industry participants to launch new programs in

collaboration with partnering government agencies. The emerging topics offer opportunity to attract

members in adjacent industries to the semiconductor industry such as the automotive, medical and

bioelectronic segments creating a stronger and more diverse SRC. 2017 has laid a solid foundation upon

which SRC will continue to build in the coming years.

Extending the SRC Global Footprint

With the addition of TSMC and Samsung in 2017, SRC continues to extend its footprint beyond the U.S.

borders. Furthermore, SRC membership now includes seven of the top ten semiconductor companies in

the world.

Looking ahead to 2018

Industry consolidation appears to be slowing and with the passing of the new U.S. tax law reducing the

corporate tax rate from 35% to 21%, there is a tremendous opportunity in 2018 to capture R&D

investment many companies are poised to make. SRC continues to refresh and diversify the overall

research agenda and portfolio in an effort to reflect the new needs of the future. Progress has been

excellent, but there is still much more to do. You can count on SRC to follow through.

Ken Hansen, President and CEO

Electors of SRC are on the SIA board and financials will be sent to the SIA CEO to be deliver to the SIA

board members.

Semiconductor Research Corporation and Affiliates Combined Financial Statements December 31, 2017 and 2016

EIN 58-1483645

Semiconductor Research Corporation Index December 31, 2017 and 2016

Page(s)

Report of Independent Auditors ............................................................................................................... 2

Combined Financial Statements

Combined Statements of Financial Position ................................................................................................ 3

Combined Statements of Activities .......................................................................................................... 4–5

Combined Statements of Cash Flows .......................................................................................................... 6

Notes to Combined Financial Statements .............................................................................................. 7–14

PricewaterhouseCoopers LLP, Captrust Tower, 4208 Six Forks Road, Suite 1200, Raleigh, NC 27609 T: (919) 791 4000, F: (919) 791 4010, www.pwc.com/us

Report of Independent Auditors To the Management and the Board of Directors of Semiconductor Research Corporation

We have audited the accompanying combined financial statements of Semiconductor Research Corporation and its affiliates (collectively referred to as “SRC”), which comprise the combined statements of financial position as of December 31, 2017 and 2016, and the related combined statements of activities and of cash flows for the years then ended. Management's Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of SRC as of December 31, 2017 and 2016, and the results of their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. March 15, 2018

Semiconductor Research Corporation Combined Statements of Financial Position December 31, 2017 and 2016

The accompanying notes are an integral part of these combined financial statements.

3

(in thousands of dollars) 2017 2016

Assets

Current assets

Cash and cash equivalents 38,573$ 42,451$

Investments 18,621 16,320

Membership fees receivable 572 1,360

Other current assets 554 413

Total current assets 58,320 60,544

Fixed assets

Computer and office equipment 798 796

Furniture and fixtures 231 231

1,029 1,027

Less - accumulated depreciation (907) (794)

Net fixed assets 122 233

Other noncurrent assets 1,540 1,654

Total assets 59,982$ 62,431$

Liabilities and Net Assets

Current liabilities

Research contracts payable 21,088$ 29,426$

Accounts payable and accrued expenses 1,847 2,515

Deferred revenue 9,588 8,457

Deferred tax liability 796 110

Total current liabilities 33,319 40,508

Other noncurrent liabilities 1,651 1,774

Total liabilities 34,970 42,282

Unrestricted net assets - undesignated 20,686 17,256

Temporarily restricted net assets 4,326 2,893

Total net assets 25,012 20,149

Total liabilities and net assets 59,982$ 62,431$

Semiconductor Research Corporation Combined Statements of Activities Years Ended December 31, 2017 and 2016


4


Change in unrestricted net assets

Revenue and gains

Member fees - undesignated 11,079$ 11,813$

Infrastructure member fees 450 448

Thrust member fees 2,933 2,600

Associate member fees - 100

Grant revenue 90 155

Investment return 2,557 811

Participant revenue 617 852

Fellowship revenue 89 -

Management fee revenue 151 156

Other 7 24

Total unrestricted revenues and gains 17,973$ 16,959$

Expenses

Contract research and grants 8,304$ 8,683$

Graduate Fellowship Program 434 386

Management and general 4,504 6,079

Income tax expense 807 371

Total expenses 14,049$ 15,519$

Focus Center Research Program

Participant fees 23,205$ 23,205$

Grant revenue 15,552 15,778

Investment return 41 44

Other income - 6

Contract research and grant expense (33,677) (35,660)

Management and general (1,817) (1,671)

Total Focus Center Research Program 3,304$ 1,702$

SRC Education Alliance Program

Participant fees 821$ 1,365$

Other income - 1


Grant expense (783) (1,463)

Management and general (198) (311)

Total SRC Education Alliance Program (141)$ (404)$

Nanoelectronics Research Initiative Program

Participant fees 4,350$ 4,125$

Grant revenue 115 3,840


Contract research and grant expense (7,255) (6,479)

Management and general (879) (836)

Total Nanoelectronics Research Corporation Program (3,657)$ 662$

Change in unrestricted net assets 3,430 3,400

Semiconductor Research Corporation Combined Statements of Activities Years Ended December 31, 2017 and 2016


5


Change in temporarily restricted net assets

Member fees - designated (SRC) 7,321 7,530

Member fees - designated (NERC) 150 375

Contract research and grants (6,038) (7,222)

Change in temporarily restricted net assets 1,433 683

Change in net assets 4,863 4,083

Net assets at beginning of year 20,149 16,066

Net assets at end of year 25,012$ 20,149$

Semiconductor Research Corporation Combined Statements of Cash Flows Years Ended December 31, 2017 and 2016


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Operating activities

Change in net assets 4,863$ 4,083$

Adjustments to reconcile change in net assets to net cash

provided by (used in) operating activities

Depreciation 115 89

Gain on sale of fixed assets (1) (8)

Deferred taxes 686 101

Net realized losses (gains) and change in net unrealized

losses (gains) on investments (1,928) (149)

Changes in operating assets and liabilities

Membership fees receivable 788 4,641

Grants receivable - 1,080

Other assets (27) 542

Research contracts payable (8,338) (2,538)

Accounts payable and accrued expenses (668) 441

Deferred revenue 1,131 1,334

Other noncurrent liabilities (123) (49)

Net cash provided by (used in) operating activities (3,502) 9,567

Investing activities

Purchases of investments (9,756) (18,563)

Proceeds from sale of investments 9,383 18,192

Purchases of fixed assets (4) (266)

Proceeds from sale of fixed assets 1 13

Net cash used in investing activities (376) (624)

Net increase (decrease) in cash and cash equivalents (3,878) 8,943

Cash and cash equivalents, beginning of year 42,451 33,508

Cash and cash equivalents, end of year 38,573$ 42,451$

Supplemental disclosures of cash flow informationFederal and state income taxes paid 151$ -$

Semiconductor Research Corporation Notes to Combined Financial Statements December 31, 2017 and 2016

(in thousands of dollars)

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1. Description of Organization and Summary of Significant Accounting Policies

Background and Basis of Combination

Semiconductor Research Corporation (“SRC” or the “Corporation”) is a nonprofit taxable mutual

benefit corporation formed in 1982 to conduct research in the fields of engineering and physical

science related to semiconductor development and manufacturing. Activity has centered on

initiation and administration of contract research with various institutions and universities. SRC has

expended approximately $1.37 billion since inception through December 31, 2017 relating to

fellowships, contract research and grant expenses and industry support activities. SRC’s charter

requires that member corporations (members and infrastructure members), which are corporations

involved in the manufacturing, purchase, use or sale of semiconductors or semiconductor related

equipment, software and materials, be assessed membership fees based on a percentage of their

semiconductor sales, use or manufacture. These fees are subject to certain limitations.

SRC has created other classes of membership some of which allow organizations and companies

otherwise not eligible for membership to join SRC. Adjunct, associate and affiliate members must

undertake research and development of semiconductor devices; they have similar privileges of

membership except they do not have direct representation on the Board of Directors. Thrust

members are companies which are eligible to join SRC as a member or infrastructure member, but

are only interested in a limited section of research. These members pay a set fee for membership

in either one or multiple research thrusts.

The combined financial statements include the accounts of Semiconductor Research Corporation

Education Alliance (SRCEA), SRCco Inc., doing business as Microelectronics Advanced Research

Corporation (MARCO), and Nanoelectronics Research Corporation (NERC). SRCEA is a nonprofit

501(c) (3) education organization. The organization manages Scholarship and Fellowship

Programs and Undergraduate Engineering Programs. MARCO is a nonprofit 501(c) (6)

organization formed in 1997 to manage a U.S. university-based pre-competitive Focus Center

Research Program (FCRP) in semiconductor technology. NERC is a nonprofit 501(c) (6) research

management organization formed to manage the Nanoelectronic Research Initiative (NRI)

program. MARCO, SRCEA, and NERC have been combined with SRC in the accompanying

financial statements because SRC maintains control of a majority voting interest in all entities. All

significant transactions and balances between affiliates have been eliminated in combination.

Basis of Accounting and Presentation

The financial statements of SRC have been prepared on the accrual basis of accounting.

Net assets and revenues, expenses, gains and losses are classified based on the existence or

absence of donor-imposed restrictions. Accordingly, net assets of SRC and changes therein are

classified and reported as follows:

Unrestricted net assets – net assets that are not subject to member-imposed stipulations.

Temporarily restricted net assets – net assets subject to member-imposed stipulations that are

expected to be met either by actions of SRC and/or the passage of time.



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Revenues are reported as increases in unrestricted net assets unless use of the related assets is

limited by member-imposed restrictions. Expenses are reported as decreases in unrestricted net

assets. Gains and losses on investments and other assets or liabilities are reported as increases

or decreases in unrestricted net assets unless their use is restricted by explicit member stipulation

or by law. Expirations of temporary restrictions on net assets (i.e., the member-stipulated purpose

has been fulfilled and/or the stipulated time period has elapsed) are reported as either revenue or

contract research and grants.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles

requires management to make estimates and assumptions that affect the reported amounts of

assets, liabilities, revenue and expenses and related disclosures. Actual results could differ from

those estimates.

Cash and Cash Equivalents

Cash equivalents consist of various short-term investments which have original maturities of three

months or less.

Investments

SRC invests primarily in mutual funds and US equities in order to provide a balanced return of

investment income and principal appreciation to SRC with a limited risk of loss exposure.

Investments are carried at estimated market values. Changes in the estimated market value of

investments are reflected as unrealized gains or losses, which are included in the investment return

amount, in the accompanying combined statements of activities.

The Corporation held investments in certain hedge funds as a limited partner, this investment was

liquidated during 2016.

Membership Fees Receivable

Membership fees receivable include amounts billed and not yet received from members.

Fixed Assets

Computer and office equipment and furniture and fixtures are recorded at cost, and depreciation is

calculated using the straight-line method over the estimated useful life as follows:

Computer and office equipment 3 years

Furniture and fixtures 3-7 years

Member Fees

Revenue from members, associate members, infrastructure members, thrust members and adjunct

members is recognized ratably over the membership term, starting at the beginning of the

membership term. Revenues from affiliate members are recognized upon receipt as participation

in the program is voluntary.

Participant Revenue

Revenue from government participants is recognized ratably over the participant term, starting at

the beginning of the participant term. In the event that the related research projects are delayed,

participant revenue is deferred until the related research projects commence.



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Participant Fees

Revenue from FCRP participants is recognized ratably over the participant term. The contracts

between MARCO and FCRP participants stipulate that any net assets which have been

accumulated by MARCO from FCRP activities shall be returned to FCRP participants upon

termination of the FCRP.

Revenue from NRI participants is recognized ratably over the participant term.

Management Fee Revenue

Revenue from fees charged to establish research projects for member specific research and is

recognized immediately upon issuance of the invoice.

Grant Revenue

Revenue from government sponsored grants is recognized upon satisfaction of funding agreement

conditions.

Deferred Revenue

Membership fees or Participant fees received in advance of the term of the membership agreement

or participant agreement are recorded as deferred revenue. Participant fees received or receivable

are deferred until specified research projects commence. For a specific participant agreement,

amounts totaling $3,632 were included in deferred revenue as of December 31, 2017, of which no

amounts are in accounts receivable. All amounts received and receivable not committed to

research projects and the related management expense are fully refundable.

Contract Research and Grants Expense

For all programs, contract research expense is recognized ratably over the term of the contract

unless qualified costs billed by the recipient are greater than the ratable amounts; in that case the

actual amount billed is recognized. Billings from the recipients are typically delayed. In order to

prepare timely financial statements, SRC employs the practice of recognizing contract expense

ratably over the term of the contract. This method approximates actual costs incurred under the

contract.

Included within contract research and grants expense in the accompanying combined statements

of activities are industry support expenses totaling approximately $1,774 and $1,868 for the years

ended December 31, 2017 and 2016, respectively. These expenses relate to special projects

undertaken by SRC and are recognized as incurred.

Unrestricted grants awarded to others are expensed at the time the grant is awarded.

Research Customization Program

SRC has designated certain assets to the Research Customization Program which commenced in

January 1997. This program allows members to direct up to 20% of their fees for domestic

members and up to 40% of their fees for infrastructure and international members to select

university projects which are of particular interest to those members. These funds are accounted

for as temporarily restricted net assets due to the third party restriction.



10

Income Taxes

SRC operates as a nonprofit taxable mutual benefit corporation, incorporated in the State of

California. MARCO and NERC are exempt from federal income taxes under Section 501(c) (6) of

the Internal Revenue Code. The SRCEA is exempt from federal income taxes under Section

501(c) (3) of the Internal Revenue Code.

The Corporation may recognize an income tax benefit from an uncertain position only if it is more

likely than not that the position is sustainable, based solely on its technical merits and

consideration of the relevant taxing authority’s widely understood administrative practices and

precedents. If this threshold is met, the Corporation measures the tax benefit as the largest

amount of the benefit that has greater than a 50% likelihood of being realized upon ultimate

settlement.

Investments

The cost and estimated market values of investments at December 31, 2017 and 2016 are as

follows:

Estimated Estimated

Market Market

Cost Value Cost Value

U.S. Equities 3$ 4$ 3$ 3$

Mutual funds 15,424 17,351 14,324 14,566

Mortgage and asset backed

securities 59 60 72 73

Exchange Traded Products 963 1,206 1,621 1,678

16,449$ 18,621$ 16,020$ 16,320$

2017 2016

At December 31, 2017 and 2016, SRC’s investment portfolio included $441 and $455, respectively,

in money market funds which are reflected as cash and cash equivalents in the accompanying

combined statements of financial position.

The components of investment return in the accompanying combined statements of activities for

the years ended December 31, 2017 and 2016 are as follows:

2017 2016

Interest and dividend income, including earnings on cash

and cash equivalents 732$ 753$

Net realized gains (losses) 69 (110)

Change in net unrealized gains (losses) 1,859 259

Investment fees (31) (31)

2,629$ 871$



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Fair Value Measurements

The Corporation adopted the provisions of the Topic 820 - Fair Value Measurements and

Disclosures (Topic 820) of the FASB Accounting Standards Codification effective January 1, 2009.

Under this standard, fair value is defined as the price that would be received to sell an asset or paid

to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at

the measurement date. Fair value measurements and related disclosures utilize the fair value

hierarchy required by Topic 820, which prioritizes the inputs to valuation techniques used to

measure fair value into three broad levels:

Level 1 - Quoted prices in active markets for identical debt and equity securities.

Level 2 – Prices determined using quoted prices in markets that are not active

or for which all significant inputs are not observable, either directly or indirectly.

Level 3 - Prices determined using significant unobservable inputs. Unobservable

inputs reflect the Corporation’s own assumptions about the factors that other

market participants would use in pricing an investment, and would be based on

the best information available in the circumstances.

Certain estimates and judgments were required to develop the fair value amounts, which are not

necessarily indicative of the amounts that would be realized upon disposition, nor do they indicate

the Corporation’s intent or ability to dispose of such instruments.

The statements of financial position carrying amounts of receivables, other assets, research

contracts and accounts payable, accrued liabilities and deferred revenue approximate fair value

due to the short-term nature of these items.

A summary of the inputs used in the measurement of fair value, as of December 31, 2017 and

2016, involving the Corporation’s assets and liabilities carried at fair value, is as follows:

Description Level 1 Level 2 Level 3 Total

Investments as of December 31, 2017 18,561$ 60$ -$ 18,621$

Investments as of December 31, 2016 16,247$ 73$ -$ 16,320$



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The following table provides a reconciliation of changes in Level 3 assets and liabilities measured

at fair value on a recurring basis for the years ended December 31, 2016:

2016

Balance at beginning of year 92$

Total realized and unrealized gain reported in

the combined statement of activities (32)

Sales proceeds (60)

Balance at end of year -$

Amount of total unrealized (loss) reported in

the combined statement of activities attributable to Level 3 assets held at year end -$

2. Operating Leases

SRC leases office space under one noncancelable lease. The lease expires in October 2021 and

has minimum rental payments as follows:

2018 304$

2019 313

2020 323

2021 276

1,216$

Rent expense was approximately $312 and $427 for 2017 and 2016, respectively.

3. Benefit Plans

SRC sponsors a number of defined contribution plans. The two principal defined contribution plans

are the 401(k) Deferred Compensation plan and the Money Purchase Plan (collectively referred to

as the “Plans”) which cover all employees. Contributions to the Plans are made by SRC based on

percentages of eligible compensation as determined by the Board of Directors. Expense under the

401(k) Deferred Compensation plan was approximately $231 and $376 for 2017 and 2016,

respectively. Expense under the Money Purchase Plan was $419 and $510 for 2017 and 2016,

respectively.

SRC also has an unfunded supplemental deferred compensation plan in which senior executives

participate. SRC established a Rabbi Trust to accumulate funds to satisfy its liabilities with respect

to this plan. As of December 31, 2017 and 2016, the assets and the corresponding liability related

to this plan were approximately $1,536 and $1,650, respectively. The assets are considered Level

1 investments. The assets and the liability are reported gross on the accompanying financial

statements, within other noncurrent assets and other noncurrent liabilities, respectively.



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4. Commitments and Contingencies

SRC has research contracts and grant commitments outstanding of approximately $21,417 at

December 31, 2017. These commitments represent active research contracts and grants entered

into through December 31, 2017, less expenses incurred by SRC on the related contracts. During

the period from January 1, 2018 through February 8, 2018, SRC committed to additional contracts

and grants. The first year commitment of these new contracts and grants is approximately

$42,236. During the remaining term of the contracts and grants outstanding as of December 31,

2017 and the contracts and grants entered into between January 1, 2018 and the date of this

report, SRC expects to commit an additional $157,645 related to these contracts and grants. SRC

may, at its option, terminate any contracts and commitments upon 60 days written notice.

Termination would not occur without due reason, justification and negotiation of contract close-out

costs as well as bridging costs for SRC funded graduate students, as appropriate.

Beginning January 1, 2018, SRC started two new research programs under SRCco. The Joint

University Microelectronics Program (JUMP) is a collaborative network of research centers

sponsored by industry participants and the Defense Advanced research Projects agency (DARPA).

The Nanoelectronic Computing Research program (nCORE) is a collaborative effort between

industry partners, the National Institute of Standards and Technology (NIST) and the National

Science Foundation (NSF). Expenditures under Federal contracts are subject to audit by the

respective cognizant agency. As SRC has recorded contracts in accordance with the agency

agreement, there are no reserves in its combined financial statements as of December 31, 2017

and 2016.

5. Income Taxes

SRC incurred income tax expense of $807 and $371 during the years ended December 31, 2017

and 2016, respectively.

Income tax benefit and expense consisted of the following: 2017 2016

Current

Federal 89$ 229$

State 32 41

121 270

Deferred

Federal 650 95

State 36 6

686 101

807$ 371$



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Components of the net deferred income tax (liability) assets were as follows:

2017 2016

Fixed assets 66$ 24$

Net operating loss 2,813 2,655

Total deferred tax assets 2,879 2,679

Valuation allowance (2,879) (2,679)

Total deferred tax assets - -

Unrealized gain on investments 796 110

Total deferred tax liability 796$ 110$

No unrecognized tax benefits existed as of December 31, 2017 and 2016. SRC did not have any

additions to its unrecognized tax benefit resulting from uncertain tax positions related to either the

current or prior years, and had no reductions resulting due to settlements. The Corporation does

not expect any change in unrecognized tax benefits within the next fiscal year.

6. Related Parties

In 1996, SRC began utilizing personnel from members’ companies to assist in program related

activities. SRC pays for these services at rates consistent with other providers. Payments for

administrative services received from these personnel for the years ended December 31, 2017 and

2016 were approximately $630 and are included in within management and general expense in the

accompanying combined statements of activities. Payments for research services received from

these personnel for the years ended December 31, 2017 and 2016 were approximately $420 and

$441, respectively, and are included in within contract research and grant expense in the

accompanying combined statements of activities.

7. Concentration of Credit Risk

A majority of SRC’s and MARCO’s revenues are generated from membership fees assessed to

participating companies in the semiconductor industry. For the year ended December 31, 2017,

three companies comprised 44.0%, 26.4% and 8.3% of SRC’s membership revenues. For the year

ended December 31, 2016, three companies comprised 42.8%, 25.7% and 8.1% of SRC’s

membership revenues. For the year ended December 31, 2017 and 2016, three companies

comprised 55.9%, 17.6% and 8.8% of MARCO’s membership revenues.

8. Subsequent Events

The Corporation has evaluated subsequent events in accordance with US GAAP through

March 15, 2018, which was the date the financial statements were available to be issued. We have

not identified any events that require disclosure.

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